Combining Household Finances: Which Method Fits Your Relationship?
I was a bit smug walking into the finance class of our pre-cana marriage preparation program. I brought a print out of our household budget - ready to walk everyone through my analysis and formulas. We were confident that we had figured out household finances.
To be a naive twenty something newlywed…it gets more complicated.
Some couples decide to completely merge their finances. Their paychecks are deposited into a joint account and all expenses - household and individual - are paid out of this account. On the opposite end are couples who keep separate bank accounts and each take responsibility for specific expenses. We chose a hybrid approach - joint account for household expenses and individual accounts for personal expenses. We each wanted our ‘own’ money that we could spend freely.
As with everything in a household, it comes down to personal preferences and compromise. The right way is what works for you.
Method 1 - Combine everything
There are couples who feel very strongly that merging of their households means that they must merge everything. It certainly seems simple and works for my parents for 50+ years.
With this approach, you may discuss:
Who will manage the household finances so you don’t spend more than you have (at a minimum) or stay within your mutually agreed upon budget (ideally)?
How will you manage individual spending - can you spend freely under a certain dollar threshold and discuss desired (i.e. before you spend it) spending above the dollar threshold?
Method 2 - Responsible for specific expenses
The couple agrees that each person is responsible for specific expenses. For example, Person 1 pays for housing, insurance and utilities. Person 2 pays for childcare, food, and other routine expenses.
With this approach, you may discuss:
How often will you revisit the expense responsibilities to assess if the split still works for both of you based on changes to income or expenses?
How will you communicate that expenses are paid and up to date?
How will you split non-recurring expenses - planned and unplanned?
How will you each contribute to an emergency fund?
Method 3 - Hybrid
The couple may decide to have a joint account for household expenses and individual accounts for personal expenses. To start, you must create an annual budget so you know how much you need to pay out of the joint account. Then, you decide whether you each contribute 50/50 based on the budget, prorated based on your income, or another method. For example, if your monthly budgeted spend is $6K, each person adds $3K into the joint account for the 50/50 split. If you prorate based on income and the couple has combined gross annual income of $100K, the person earning $30K adds $1.8K (30K/100K = 30%) into the joint account and the person earning $70K adds $4.2K (70K/100K = 70%) Variable compensation (e.g. commission, bonus, etc) complicates this approach a bit. One method is to use the prior year gross income (before deductions for taxes, benefits and retirement contributions) for the proration.
With this approach, you may discuss:
How will you pay for non-recurring planned household expenses - major house maintenance (e.g. exterior painting) and appliance replacement? Or non-recurring unplanned household expenses?
How do you define individual expenses - personal hobbies, solo travel, car, medical expenses (e.g. prescription drugs, deductibles, co-pays)?
Will you have a joint credit card for household expenses and individual credit cards for personal expenses? Or do you want one credit card to maximize rewards and reimburse the joint account for personal expenses?
Regardless of the method you choose for paying household expenses, it is important for both of you to understand household finances. This could include:
Monthly review of actual expenses against budget to assess if you are over or under spending and where you need to adjust; verify that bills are current; and revisit if your spending still aligns with your family values.
Quarterly review of retirement accounts to review your 401k contributions, investments, and total balance. Are your contributions on track to meet your retirement savings goals? Are both of you diligent with your contributions? Have there been distributions or loans taken out of the accounts?
Annual review of credit reports and credit scores to verify that accounts are accurate and identify opportunities to improve credit scores, if needed. Your credit score impacts your ability to qualify for a loan, borrowing interest rate, insurance premiums, and sometimes, employment.
As more couples wait to combine households until they are older - and thus, more established financially, merging household finances will get more complicated. These considerations provide a starting point for discussions.